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I would shorten Alphaghetti's letter a bit, it's a little wordy and really, you don't have to explain things to anyone. I would also take out any number referring to how many children you're taking in or how many spaces you're filling because it brings you right back to square 1...you only said 4 and now you want 5?...kwim 
I would shorten it to maybe this...
Dear Parents,
As you all know, this is my first year in operation as a full time day care provider to more than one child. As with any business, the first year is a learning experience and as with any business, terms and conditions change, leaving clients and business owners with the option of changing with these modifications to better either the client or owner. I have learned a lot this year, including that I am more than capable of comfortably handling more than I originally stated. The Ontario Day Nurseries Act dictates that any one home child care provider is entitled to care for up to five children at a time, not including their own. My children have reached a point where they require very little hands on care from me during my operating hours so I feel comfortable taking in more friend's for the children to play with.
I would never put any of your children in harm's way, and if I thought for a moment that I was unequipped to care for more children, I simply would not do it. I will begin to advertise my available spaces effective immediately. I will, however, not take on any other children until one calendar month from now, leaving you the option and ample time to find alternate care arrangements should you feel that you need to. I would very much like to move forward with all of my clients in place despite this change to my business, but know that I do understand if my new situation no longer meets your family's needs.
With Sincere Respect, Me
This is what I would send. It's sweet, to the point with no wiggle room for the parents or needing to explain yourself.
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